Junk Bond - Junk Notes

Corporate bonds that are rated below investment grade are considered junk or speculative. Standard and Poors and Moodys are 2 rating agencies that will rate the credit quality of corporate notes and bonds.

A bond that has a rating of below Baa/BBB are considered speculative. The reality is over 95% of these securities pay off fine, but because of their junk rating (pretty strong word), they will offer a higher yield or rate of return. So, the majority of investors buying these bonds will earn more money than investors who only buy AAA or high rated corporate bonds and notes.

There are domestic and foreign issues of speculative bonds. Some of these securities are also callable and/or convertible. A callable junk bond will have a set call date that the issuer can redeem the bonds back early at. There will be a set call price on these securities as well. Normally a junk bond is called when interest rates have declined to a certain level. Thus, the investor will get their money back when interest rates are low. Callable bonds will have a higher yield than non callbale bonds if the quality is the same and the maturity is as well.

Convertible junk bonds are securities where the investor can convert into common stock of the issuing corporation.

Convertible Bonds
Subordinated Debentures